Bubble Meter is a national housing bubble blog dedicated to tracking the continuing decline of the housing bubble throughout the USA. It is a long and slow decline. Housing prices were simply unsustainable. National housing bubble coverage. Please join in the discussion.

Friday, October 31, 2008

Let’s say you take all the people who claim to be in trouble on their mortgages. Take those mortgages away, lower the value of the house to the current market price, and calculate the monthly payment based on the current interest rate on the 30-year fixed (and I mean conforming, not jumbo) which is around 6.35 percent. Oh, and by the way the historical average on the 30-year fixed over the last 25 years happens to be 7.89 percent, so I’m offering a deal. How many of those folks could still afford the home? My guess is that some could, but many more could not.

What I’m getting at here is that no matter how far we go in modifying, restructuring, writing down principal on loans in order to stop foreclosures, the bottom line is that most of the borrowers in trouble had no business being in the homes they bought in the first place. You can modify their loans for five years, but they will probably lose the home anyway.

Is that mean? It’s not meant to be. I just think that in order to set the market right we need to let prices fall to where they must and start over again with mortgages, buyers and homes that make sense. We’re all losing money here, but that’s because so many people took advantage of free money during the housing boom (and don’t get me started on how those who didn’t take advantage of that free money still get screwed).

I understand the need to restore the credit markets and stop the crash in housing, but keeping folks in homes that are way beyond their means is just prolonging the pain of the inevitable.

Apartment renters back Barack Obama for president almost 3-to-1 compared with John McCain, according to survey results released Tuesday by Apartments.com, an online listing service.

With the widespread housing market troubles, the survey’s results may come as no surprise as 90% of renters said the national economy is the most important of their top three issues. Health came in at 59%, and the Iraq War at 53%.

Among renter respondents, 59.1% said they back Obama, another 23.2% John McCain, 9.2% preferred not to answer, 5.6% are undecided, and rest responded "other."

Dividing 59.1 by 23.2 gives us an Obama/McCain ratio of 2.547 to 1. That can be rounded to 3/1 or, more precisely, 5/2.

Am I not doing my job? Or is nobody listening? How is it possible, in the midst of the worst credit crisis in history, which is predicated on one of the biggest housing crashes in history, that nearly half of all Americans still don’t get that home prices are falling?

A new survey from Zillow.com finds that a full 49 percent of those surveyed think their home has either retained its value or even gained value in the past year. According to Zillow, 74 percent of all U.S. homes have lost value in the last year. Don’t believe Zillow? How about the National Association of Realtors: Home prices down 9 percent nationwide in the past year. How about the government’s Office of Federal Housing Enterprise Oversight: Home Prices down 5.9 percent since last year. How about any real estate agent in the phone book??

Ok, I get it, all real estate is local, and a lot of folks simply believe that those national numbers don’t apply to their neighborhood. Yep, there’s some truth to that, there are some neighborhoods in some cities that are still strong. But not half the homes in the country!!! ...

Price a home correctly, even aggressively, in today’s market and it will sell, and that’s the road to recovery my friends, not listing your home for sale right in the heart of la la land.

Gerry Connolly, the chairman of the Fairfax County Board of Supervisors, is the Democratic candidate running to represent Virginia's 11th congressional district in the U.S. House of Representatives. Yesterday, I noticed the National Association of Realtors PAC is running television advertisements endorsing him.

The National Association of Realtors is one of the groups responsible for the housing bubble and the economic crisis that has followed. They were the ones out there misleading prospective home buyers by telling them, "Don't worry about the price, real estate prices never go down." After the housing bubble peaked, the National Association of Realtors repeatedly lied to the press about the outlook for the housing market. They kept saying that a housing market recovery was just around the corner. They predicted a housing recovery in late 2005. When that didn't occur, they predicted one in 2006, then 2007, then 2008, and now they say it will come in 2009.

The government is preparing to unveil a plan that would help around 3 million homeowners avoid foreclosure, sources briefed on the matter said.

A final deal had not been reached as of Wednesday afternoon and negotiations could still fall apart, but government agencies were contemplating using around $50 billion from the recently passed bailout of the financial industry to guarantee about $500 billion in mortgages.

The plan could include loan modifications that would lower interest rates for a five-year period, according to two people briefed on the plan. ...

The plan would be the most aggressive effort yet to limit damages from the collapse of the housing bubble that has shaken financial markets around the world and sparked fears of a global recession. ...

The government’s program would be run by the Federal Deposit Insurance Corp. The agency’s chairman, Sheila Bair, said last week she was working “closely and creatively” with the Treasury Department on such a plan, but revealed few details.

Sales of newly constructed homes rose in September, according to the monthly report from the U.S. Census Bureau, inching up 2.7% from August to an annualized rate of 464,000. ...

But the reading was still the worst September for new home sales since 1981. Sales are down 33.1% from September of 2007, and far below the pace of the boom years. In 2005, for example, 1.3 million new homes were sold.

In response to slower sales, home builders have been reducing their production. As a result inventory has fallen, but there were still about 394,000 new single family residences on the market at the end of September. At the current pace of sales, that would take 10.4 months to sell through.

The median selling price for a new home was $218,400 during the month, down from $221,900 in August, while the mean selling price was $275,500, up from $263,900.

Tuesday, October 28, 2008

Data through August 2008, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, shows continued broad based declines in the prices of existing single family homes across the United States, a trend that prevailed throughout the first half of 2008 and has continued into the second half.

The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. Once again, the indices have set new records, with annual declines of 17.7% and 16.6%, respectively. However, the acceleration in decline was only moderate in August. The July data reported annual declines of 17.5% and 16.3%, respectively.

The Washington, D.C. metropolitan statistical area is down 15.4%, year over year.

Mortgage lenders have helped nearly 2.5 million troubled homeowners avoid foreclosure since the mortgage meltdown began in the summer of 2007.

That's according to the latest report from Hope Now, the coalition of banks, mortgage-securities investors and housing counselors formed by the Bush administration to stem the foreclosure crisis.

Hope Now members helped 212,000 borrowers stay in their homes in September, a new record and an increase of 12% from August.

Despite Hope Now's best efforts, however, many homeowners are still falling through the cracks. According to Hope Now, 85,793 homes were lost to foreclosure in September, down 1% from August. At that rate, more than a million families will have their homes repossessed in the next twelve months.

FYI: In the past, Art Laffer has been called a quack by Harvard economist Greg Mankiw (also a Republican). Laffer will be a subject of a Flashback post on November 30th, as he is one of the people who denied the existence of the housing bubble.

Many investors believe the central bank will cut rates by at least another half-percentage point following the end of a two-day meeting on Oct. 29.

In fact, the fed funds futures on the Chicago Board of Trade are now pricing in a 26% chance that the Fed will cut rates by three-quarters of a percentage point to 0.75% by that meeting.

Fed Chairman Ben Bernanke has said in recent weeks that economic weakness is likely to continue into next year, despite rate cuts and other recent moves taken by the Fed and Treasury Department to try and fix the credit crisis.

On Monday [October, 20], Bernanke pushed Congress to consider a new stimulus plan to spur the economy.

"Everyone at the Fed has pretty much told you they're going to cut," said Rich Yamarone, director of economic research at Argus Research. "They're in a kitchen sink mode right now. Rate cuts, fiscal stimulus, bailouts - they're throwing everything they can at this right now."

It was said that the Fed under Alan Greenspan believed that it should ignore bubbles, and just mop up afterword. It is now obvious that the flood requires more mopping than the Fed can handle. Great job, central bankers.

Monday, October 27, 2008

Federal Reserve chairman Ben Bernanke is known by the derogatory nickname "Helicopter Ben." The nickname comes from a speech he gave in 2002, in which he referenced Milton Friedman's metaphor of a helicopter dropping money on a community as a way to rescue the economy.

Well, it turns out that the helicopters are now flying. The graph below, which comes from Greg Mankiw's Blog, shows the monetary base since 1986. The monetary base is defined as currency plus bank reserves.

A Poem, by yours truly:

Real estate wasThe way to get rich.Just buy a homeAnd give it a flip.

If you bought more houseThan you can afford,Helicopter BenWill dump money at your door.

He's Helicopter, Helicopter,Helicopter Ben,The money-throwing manWho's working at the Fed.

Money from the clouds,Money from the sky,Manna from heaven,Thank that helicopter guy.

Sales of existing homes rose in September, but prices continued to drop, according to the latest reading on the battered housing market by an industry trade group released Friday.

The National Association of Realtors reported that sales by homeowners jumped in September to an annual pace of 5.18 million, up 1.4% from a year ago. It was the first time that sales rose compared to a year earlier since November 2005.

September sales were up 5% from the August reading of 4.91 million, marking the largest month-to-month increase since July 2003. ...

Though the numbers were encouraging, they do not yet suggest the problems in the housing market are behind us. September's numbers represent contracts signed in July or August — before the mid-September credit crunch tightened the stranglehold on lending and sent confidence in the economy crashing. Sales figures for October and November are likely to reflect this credit freeze. ...

"Compared to a fairly small share of foreclosures or short sales a year ago, distressed sales are currently 35% to 40% of transactions," said Lawrence Yun, chief economist with NAR. "These are pulling the median price down because many are being sold at discounted prices."

San Diego County has experienced unprecedented increases in real estate values in recent years, with homes appreciating as much as 20 percent to 30 percent a year.

Such appreciation has given rise to the notion that there is a "housing bubble" — that is, an unsustainable gain in home prices that, in effect, creates a price bubble that will suddenly "pop," resulting in a loss of equity by homeowners.

The housing bubble is an economic myth, particularly in North San Diego County, where demand for housing has long outstripped supply — even in today's cooling market. A cooler housing market in which price increases are more in line with other economic growth factors does not signal the bursting of any so-called housing bubble — or the end of a vigorous housing market. Housing price increases can level off significantly and still provide good investment opportunities for buyers and sellers alike. ...

The only threat we face is loss of confidence on the part of those who want to buy or sell homes and other real estate. The plain fact is there is a lot of misleading and jaded information out there.

For example, those pundits who try to compare real estate to NASDAQ's meteoric rise are missing a couple of important points. Unlike stocks, real estate, especially at the national level, rarely decreases in value. Even when declines have occurred, they've been modest at best. ...

In the end, it is the marketplace — not panicky doomsayers — that will determine the future of our region's housing market. Continuing confidence in the viability of San Diego County and the fact that more people want and need to live here is the best evidence there is to disprove any housing bubble.

Mr. Forrester forgot to mention that the significant financial leverage (i.e. the mortgage) used to purchase a home greatly magnifies the effects of even a small percentage decline.

He also engaged in the type of thinking that says "the place I live is special, so even if prices fall elsewhere, they won't fall here because of its specialness." In fact, southern California is ground zero for the housing decline. Whoops!

Saturday, October 25, 2008

As the financial crisis hits Main Street America, nearly one in six U.S. homeowners are finding themselves [underwater on their mortgages], threatening the U.S. economy with a new wave of foreclosures and bankruptcies.

About 12 million U.S. homeowners owe more than their homes are worth, compared with 6.6 million at the end of last year and slightly more than 3 million at the close of 2006, said Mark Zandi, chief economist at Moody's Economy.com. ...

If ... these homeowners go into foreclosure, it would add to the oversupply of homes, delay a recovery in the housing market, and add to pressure on banks. ...

In a slowing economy, it doesn't take much to push an underwater mortgage into default.

"When you're under water and you have some kind of hit to your income or some kind of unintended expense, that's when you default. And so now we've got this noxious mix of millions of people under water and quickly rising unemployment," Zandi said. ...

Economists like Zandi worry that the underlying housing crisis could eventually prove much more costly to the U.S. taxpayer than the $700 billion the U.S. government has pledged to recapitalize banks and buy up distressed debt from financial institutions.

"The government is going to have to start filling this negative equity hole and that's just going to be a direct cost to taxpayers," Zandi said. "This is going to be the really costly part, I think, for taxpayers." ...

Nationwide, for those who purchased U.S. homes since the beginning of 2003, nearly one in three now have negative equity.

Friday, October 24, 2008

The [thing] that strikes me is the positively bewildered expressions on the faces of the chief economists of both associations. These poor guys are tasked with telling everyone when it's all going to get better, and the fact of the matter is they just don't know. Don't get me wrong, these are supersmart guys, number crunchers with decades in the business, but as NAHB's David Seiders said, the risk in housing right now is just so high that it makes forecasting extremely difficult.

The chief economist at Fannie Mae, Doug Duncan, spoke to the builders conference today and reminded folks here that forecasts are based on trends in history i.e., how did similar circumstances result in the past? But, as he astutely points out, there is no historical data, no past trend, no previous parameters by which to judge today's scenario. Never before were there so many borrowers who put down no equity, so many who declined to state income, so many with negative amortization loans.

Don't worry, the recovery is right around the corner, just like they predicted in 2005, 2006, 2007, 2008...

Sales of housing units have increasing dramatically, from last year, in many hard hit bubble areas due mainly to much lower prices (many of them foreclosures). Think Prince William County-VA, Loudoun County-VA and Riverside County - CA.

The housing crisis still has a choke hold on America: In September, 81,312 homes were lost to foreclosure, according to a report released Thursday.

RealtyTrac, an online marketer of foreclosed properties, said that 851,000 homes have been repossessed by lenders since August 2007.

In September, 265,968 troubled borrowers received foreclosure filings — such as default notices, auction sale notices and bank repossessions. That's a decline of 12% from the record high number of filings in August, but 21% more than in September 2007.

All told 765,558 foreclosure filings were made on U.S. properties in the third quarter of this year — up 3% from the second quarter and 71% from the same period last year.

"We have never seen a foreclosure cycle like this one before," said Rick Sharga, Realty Trac senior vice president. Other periods of elevated foreclosure rates have been preceded by signs of economic weakness. However, "in this cycle, we have foreclosure problems that have caused an economic downturn."

The US economy is entering a two-year recession that will be longer and deeper than previously feared, said Nouriel Roubini, a well-known economist and professor at New York University.

"I believe we're going to have two years of negative economic growth," Roubini said on CNBC. "The last two recessions lasted only eight months each ... This time around this is going to be three times as long, three times as deep. This is going to be the worst recession the US has experienced since the 1980s."

A slowdown in global economic growth combined with continued problems in credit markets and housing will haunt the economy, Roubini said. ...

"I believe that the worst is still ahead of us. I think that the next few weeks and months are going to be negative surprises on the economy," he said. ...

"But we're going to have a severe recession. If this is going to be a two-year recession, that's not priced by the market. And there are significant downside risks for the stock market and credit markets in my view," he said. "Yes, we're going to avoid the Great Depression, we're going to avoid a 10-year stagnation. That's not going to be the case."

Notice that he predicts the worst recession since the 1980s, not the worst since the Great Depression. When economists say that this is the worst financial crisis since the Great Depression, many economically-challenged journalists incorrectly report that this is the worst economic crisis since the Great Depression. A financial crisis (affecting the financial system) and an economic crisis (affecting the broader economy) are not the same.

Thursday, October 23, 2008

Warren Buffett is widely regarded as the world's greatest investor. His basic strategy is to buy great companies at low prices, and then hold them forever. Many investors try to emulate Buffett's investing method when making their own stock picks, but few can match Buffett's success.

However, one investing strategy available to ordinary investors is buying stocks that Buffett actually owns, when they fall below his original purchase price. Luckily, he lists his major holdings in Berkshire Hathaway's annual letter to shareholders. With a little basic math, you can figure out how much he paid for the stocks he bought.

Today, with the recent stock market sell-off, many of Buffett's holdings are selling for less than what he paid for them. This gives you the opportunity to buy them on sale. I have calculated the purchase price for his major holdings. Here are the ones that are currently on sale.

According to news reports, Lawrence Yun—chief economist for the National Association of Realtors—lives in Arlington, Virginia. However, I just learned that he also owns this lovely 3 bed/2.5 bath rental home right here in Centreville, Virginia.

Here, the green line represents the value of Lawrence Yun's house. The yellow line represents the median value of all Centreville houses.

Wednesday, October 22, 2008

In the current edition of The Outlook, Standard and Poors presents its forecast for the recession (source offline; no link available):

The economy will likely suffer a moderate, but long recession, and a sluggish recovery, according to S&P Economics. From the December 2007 peak to a trough in May 2009, this expected 17-month recession would be longer than the 50-year average of 10.7 months, and near the longest recessions of 1975 and 1982. ...

We’re forecasting negative gross domestic product (GDP) growth for the fourth quarter of 2008 and the first half of 2009 for a total decline of 0.9%. While business tax credits should likely provide some boost to the fourth quarter, borrowing restrictions will mean that boost will be smaller than we originally thought.

Still, this should be a moderate recession. Unemployment will likely climb to 7.5% by summer 2009 from its March 2007 low of 4.4%. The S&P 500 dropped nearly 40% through October 10, near the historical average decline of 36% during a recession. As stock prices normally lead the economy by three to six months, they should bottom in the fourth quarter.

The Fed chopped the Fed Funds rate to 1.5% from 5.25% last September. We expect the central bank to remain on hold until the recession is over before raising rates in the fall of 2009. The 10-year Treasury yield dropped to 3.8% from a peak of 4.5% last summer. However, the cost of funds for businesses and individuals has risen due to the credit crunch.

The fiscal stimulus package will likely bring the fiscal 2008 federal deficit slightly above the 2004 record of $413 billion. We expect the record to easily be broken next year, with a deficit exceeding $700 billion, depending on how the Troubled Asset Relief Plan is treated.

Democrats, and the Democrat-friendly press, have been very eager to blame the financial crisis on deregulation. However, Wharton Business School finance professor Jack Guttentag says deregulation didn't cause the financial crisis.

Deregulation, meaning the scrapping of existing regulations, was not a factor in the crisis. The only significant financial deregulation in the past three decades applied to commercial banks. Restrictions on where they could have branches and on their involvement in investment banking were both removed. Most economists, including me, believe that these actions made the banks stronger than they would have been otherwise.

Regulation in itself is a weak defense against financial crises. One major reason is that it tends to look backward, similar to generals fighting the last war. ...

Regulators have no better foresight than do the firms they regulate. Both use statistical models based on experience. A change in the underlying structure of the economy can make such history irrelevant, which is exactly what has happened. Nobody anticipated the severity of the current crisis because, relative to the past, it is off the chart. ...

Can we prevent this sort of problem from happening again? Yes, but the next crisis will almost certainly be different.

Remember that the next time you see CNN blaming Phil Gramm for this mess, without any hard evidence. I dislike Phil Gramm, but he is not responsible for the current troubles.

Tuesday, October 21, 2008

Gross was encouraged that the passage of the Treasury Department's proposed $700 billion Troubled Asset Relief Program would pay off in a few ways. In particular, he was and remains confident that the acquisition of troubled mortgages by the United States government will ultimately produce profits for Uncle Sam. As long as the government picks them up at the right price—and there's a lot of room for error given how cheaply subprime mortgages are currently being marked—returns of 10% or more are well within the range of possibility according to his analysis.

But the main reason for his advocacy of the plan is that he believes it will be critical to avoiding the catastrophic outcomes of inaction that would have included massive job losses, plummeting economic productivity, and waves of bankruptcies. In fact, in the absence of an effective government policy response, Gross has described a "daisy chain" of trouble snowballing from margin calls, disappearing leverage, and institutional failures that would roll through the financial, housing, commercial real-estate, stock and bond markets. Meanwhile, he also sees the TARP as a catalyst that will put banks in a better position to make loans. ...

With the specter of such massive government spending on the horizon, though, we pressed Gross for more thoughts on the future. ... The U.S. has been living on the creation of more and more debt for some time, activity that can cheapen the value of our currency versus those of more fiscally restrained nations, notes Gross. Unless something changes, he argues that we can't expect the U.S. dollar to maintain long-term strength, a point that he and PIMCO have been making for many years.

If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.

The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it's so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses.

Now, Alan Greenspan has issued an epilogue to his memoir, "Time of Turbulence," and it's about what's going on in the credit market. And he says, "Well, it's true that monetary policy was expansive. But there was nothing that a central bank could do in those circumstances. The market would have been very much displeased, if the Fed had tightened and crushed the boom. They would have felt that it wasn't just the boom in the assets that was being terminated."

[Greenspan] absolves himself. There was no way you could really terminate the boom because you'd be doing collateral damage to areas of the economy that you don't really want to damage.

I don't think that that's an adequate kind of response to those who argue that absent accommodative monetary policy, you would not have had this asset-price boom.

My Uncle Bob* used to work on Wall Street. Twenty-one years ago, he had completely avoided the 1987 stock market crash by pulling completely out of the market months earlier.

Last year, on August 14, 2007, he sent an email to my cousins and me warning about the credit crunch. He warned us to be cautious, conservative, and avoid financials. He rarely sends out investment advice, so his email of warning was a rare and timely event. In retrospect, he wasn't bearish enough.

For the first time since 1987, I've become a bit of a bear, though nowhere near as bearish as I was back then.

The markets continue to be easily rattled, and the Fed has stepped in very significantly because it is worried. So what does one do with one's investment portfolio at a time like this?

Be cautious and conservative. There likely will be a flight to quality: be in large cap, high dividend yielding U.S. and European stocks (but not banks and financial institutions) or mutual funds and money market funds. Bonds and bond funds are a possibility, but at some point interest rates will start going up, at which point the bonds will lose value, so money market funds yielding 4.8% are safer than longer term bonds yielding only slightly more (i.e. 5% to 6%).

I'd ease up on emerging markets, which has been the place to be for the last four and a half years, and small cap stocks or funds (especially small cap with low or no dividends).

Unlike 1987, when I was bearish because of over-valuation in the markets, this time I'm bearish because of an impending credit crunch. So it's okay to remain in the S&P 500 index, which is large cap and will be among the last to fall if things really get ugly. Also, this isn't apt to last a long time, probably only a month or two. As the credit crunch subsides, the markets will strengthen and then one will want to be in equities, which continue to be fairly valued (perhaps even slightly undervalued).

So hang in there, but get rid of the riskier holdings.

A week-and-a-half ago, I got another email from him. Now he is very bullish.

I thought I should let you know that I think we are very near the market bottom. I have been cranking numbers all morning. From the high a year ago, the Dow is off 40.3% and the S&P 500 is off 42.5%. Of the 16 recessions in the last century (since 1920; prior data unreliable), the Dow on average has fallen 31.4%. It has only fallen more than the current 40.3% four times (41.9% after the first World War, 45.1% in the 1973 oil crisis, 49.1% in 1937-8 and 89.2% in the Great Depression), so only once since the second world war.

So, unless we repeat the Great Depression, which seems highly unlikely given the steps the Fed and Treasury are taking in contrast to Hoover's do-nothing policy, we likely are at or very near the bottom for the stock market. I certainly wouldn't sell anything at these low levels, and I very timidly started buying on Friday. The safest move is investing in companies that can finance their own growth without having to access the credit market and are paying a substantial dividend (more than 3% yield).

I'm also a believer in buying TIPs (Treasury Inflation Protected Securities), as the Fed and Treasury actions seem likely to lead to inflation, though not everyone agrees with this. Vanguard has a fund that invests in these.

For you young guys, this is likely the buying opportunity of a lifetime!

Monday, October 20, 2008

Freewheeling American capitalism may be falling out of fashion on Wall Street, but in the western suburbs of Northern Virginia, it is driving one of the greatest home-buying sprees the region has ever seen.

The epicenter of the boom is Prince William County, where enterprising investors are scavenging the wreckage of the housing bust at a furious pace. Last month, 1,116 homes were sold in the county, a 235 percent increase from the same period last year and more than in any other September on record, according to the Northern Virginia Association of Realtors.

The buying frenzy is the silver lining of a staggering decline in home values. With banks choking on a glut of empty, foreclosed properties, the median sale price for detached single-family houses in Prince William plunged 41 percent in the past year, from $405,000 to $239,900. ...

Nowhere else in the region has the drop in prices and surge in sales been so extreme. ...

Much of the dealmaking has been led by investors, according to real estate agents who specialize in foreclosed properties. Doctors, lawyers, engineers — anyone with good credit and disposable cash — are becoming part of a burgeoning class of landlords. ...

Because of the oversupply, banks are likely to continue slashing prices, dragging down property values for nearby homeowners, in order to maintain a competitive advantage over other sellers. ...

For buyers, the dizzying pool of repossessed property is not likely to dry up anytime soon.

Warren Buffett, the world's greatest investor, has a message for people who have become fearful of today's stock market: Buy stocks now!

I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over. ...

Over the long term, the stock market news will be good. ... Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset.... Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. ... Today my money and my mouth both say equities.

The American housing market, where the global economic crisis began, is far from hitting bottom.

Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession. ...

Adding to the worries nationwide are rising unemployment, falling wages and escalating mortgage rates — all of which will reduce the already diminished pool of would-be buyers. ...

One reliable proxy of housing values — the ratio of home prices to rents — indicates that in many cities prices are still too high relative to historical norms. ...

The current housing downturn is much more national in scope and severe than any other in the postwar period, partly because of the proliferation of risky lending practices. Today, foreclosures are running ahead of the downturn in the economy, a reversal of previous housing slumps.

Huh? I thought the housing bottom was always supposed to be right around the corner. People have been saying that for years.

Initial construction of U.S. homes fell to a fresh 17-year low in September, according to a government report released Friday.

Privately owned housing starts fell to a seasonally adjusted annual rate of 817,000 in September, according to the Commerce Department. The rate was down 6.3% from August's revised reading of 872,000 and 31.1% lower than September 2007. ...

Housing starts have fallen nearly two-thirds from their peak of 2.3 million in January 2006, and were at the lowest annual pace since January 1991.

Sunday, October 19, 2008

A number of economists and commentators have been blaming Hank Paulson for allowing Lehman Brothers to fail. After all, it was the failure of Lehman that caused the current bout of financial turmoil. In this video, Bernanke says neither the Federal Reserve nor the U.S. Treasury could prevent Lehman's failure.

Imagine an announcer came on TV and said, "Welcome to the 2008 Bank Telethon. You've heard all the horror stories. Now, with the holiday season approaching, I know you'll want to reach deep into your pockets to lend a hand."

"I know what you're wondering: How much should I give? Well, the banks need $250 billion. I know—that sounds like a lot of money to raise in just one telethon. But if each household in America gave just $2000, then we could reach our goal. So let's get every household in America to pledge $2,000 to the banks so that they can start lending again."

If that were the announcer's pitch, would you give the $2,000?

Guess what. You just did.

There's one thing very wrong with this description. We did not give $250 billion to the banks, we invested that money in the banks—and against the banks' will in some cases. A better description would be if every American household bought $2000 in newly issued bank stocks.

There is NO real estate “bubble.” The slowdown appears to be psychology oriented and has been egged on by constant articles and comments in the press. The reports are greatly exaggerated and inflammatory and designed to cause trepidation amongst consumers. It is a known fact, that negative news sells many more papers and garners more attention than positive news.

Consider the following facts: Appreciation rates are slowing but not declining. That means prices in most of our market areas will continue to climb but at a more gradual pace than in previous years. The economy is healthy in our area and is generating jobs. This leads to continued demand for real estate. ...

The fundamentals leading to a continued vigorous real estate market are strong. There are 78 million baby boomers. Single women are the single largest growing segment of our population and they buy more real estate than other segments of the population. There is still a high rate of immigration and as many as 25-30% of houses purchased are purchased by someone not born in the U.S.

So, in contrast with the past few years, housing is slower, but market fundamentals are still very strong.

Whether the economy needs a "plan," or whether the plan will help the markets, is beside the point. The plan serves to consolidate power. Four weeks ago, the Fed and the Treasury had far more power than anyone can intelligently use. Still, they came to Congress requesting more power. Then, when the bill was passed, Paulson took even more power than what it sounded like the legislation was giving.

Now, there are rumors that the Democrats plan to re-appoint Paulson as Treasury Secretary. This American Mussolini has captivated Washington by demonstrating the exercise of raw power.

What I call the "suits vs. geeks divide" is the discrepancy between knowledge and power. Knowledge today is increasingly dispersed. Power was already too concentrated in the private sector, with CEO's not understanding their own businesses.

But the knowledge-power discrepancy in the private sector is nothing compared to what exists in the public sector. What do Congressmen understand about the budgets and laws that they are voting on? What do the regulators understand about the consequences of their rulings?

We got into this crisis because power was overly concentrated relative to knowledge. What has been going on for the past several months is more consolidation of power. This is bound to make things worse. Just as Nixon's bureaucrats did not have the knowledge to go along with the power they took when they instituted wage and price controls, the Fed and the Treasury cannot possibly have knowledge that is proportional to the power they currently exercise in financial markets.

Thursday, October 16, 2008

The National Association of Home Builders says its housing market index hit a record low this month as the U.S. financial crisis shook builders' confidence in the prospect for improved sales of new homes.

The Washington-based trade association said Thursday the index tumbled by three points to 14 in October. The index stood at 17 last month, a one-point increase from August.

Low mortgage rates have been the one bright spot in an otherwise devastated housing market, but now they're on the rise.

Historically rates are still very low, but experts say they could continue to creep up.

The average interest rate on a 30-year, fixed rate mortgage jumped to 6.6% late Tuesday from 6.06% the Tuesday before, according to Keith Gumbinger of HSH Associates, a publisher of mortgage information.

A borrower with a $200,000 mortgage would pay about $1,207 a month at 6.06%, and $70 more at 6.6%.

Mike Larson, an analyst with Weiss Research who participates in Bankrate.com's weekly mortgage rate surveys, expects to see rates top 7% in the next six months, and then turn back down.

That's quite a bit higher than rates have been, but it's no disaster.

Gumbinger blames the rate increase on the massive federal bailout. To fund the rescue and the new government guarantees, Treasury must sell a raft of new Treasury bills to raise money.

"Who even has the cash to buy them all?" said Gumbinger. "The Treasury has to offer higher interest rates to sell."

Mortgage rates tend to move in conjunction with Treasurys. ...

So, with Treasury yields on the rise, mortgage rates should continue to be a more expensive for the next few months, he said.

With the price of oil falling below $75 a barrel Wednesday — down about 49% from last summer's highs — the industry's battle cry is sounding less and less convincing.

But falling oil prices are not the only reason why the air is coming out of the drilling balloon. The credit crunch has hampered oil company's ability to fund big-ticket drilling projects. Meanwhile, the prices that producers pay for raw materials and labor remain high.

"Any project that assumed oil would average $100 over the next 10 to 20 years is being seriously reconsidered at this time," said Richard Ward, senior cost analyst at IHS Cambridge Energy Research Associates (CERA).

As recently as July, tapping deep water sources and extracting crude from Canadian oil sands - two very expensive production methods - were seen as economically viable ways to deal with the energy crisis. At that time, the price of oil was above $140 a barrel.

Now that the price has fallen below $75 a barrel, and could go even lower, many experts say the future of these projects is uncertain.

Oil companies are quick to point out that big drilling projects are long-term investments, which are not based on today's oil price, but on what they think the price will be in the future.

Indeed, some deep water projects have a life span of 20 to 30 years. And some producers expect to be mining Canada's oil sands for up to 40 years.

This January, local tax authorities will begin to send out property assessments for 2009, telling homeowners what their property is valued at, and how much their tax bill is.

But many assessments won't reflect any of the steep home price declines that have been making headlines for the last year or so.

And even if property assessments do drop, property tax bills won't necessarily be any lower. ...

Property taxes climbed relentlessly earlier this decade as home prices rose, according to Pete Sepp, spokesman for the National Taxpayers Union. This year Americans will pay more than $400 billion in property taxes, up about 25% from levels in 2004 and double what they paid ten years ago. ...

But even if local prices are way down, taxpayers may not win a lower assessment, because there can be a big lag time between when the home sales used to calculate them take place and when the assessment is actually issued.

To calculate 2009 assessments, for example, assessors will use home sale prices from 2008 or even earlier, according to Sepp. Usually this works to taxpayers's advantage, since price increases take a while before they are fully reflected in assessments. ...

There's another reason why homeowners are unlikely to see any decrease in property tax bills. In some states, such as California, Washington State, Massachusetts and Idaho, taxes are based on the last resale price of the house. Even a home worth $500,000 in California may be taxed based on the sale price when it was bought 10 years earlier for $200,000. ...

Even if citizens do receive a lower assessment ... their property tax bill may not shrink at all.

Tax collectors often raise tax rates to offset lower assessments to meet their budgets, which will be very strained this year. Assessments go down but rates go up so that the tax collections stay roughly the same.

"State and local governments depend very heavily on real estate taxes and they are reeling from a loss of revenues from sales taxes and other sources," said Bruce Hahn.

As oil prices zoomed toward an unheard of $147 a barrel this summer, it seemed every analyst prediction that oil would approach $200 was a self-fulfilling prophecy, until suddenly it was not.

Instead of $200 oil, oil is now $80. Instead of going up, U.S. demand has fallen at the steepest rate since the oil-shocked 1970s. Americans have dramatically cut down on driving over the past year.

Soaring prices for oil and other commodities this summer have turned out to be nothing short of another classic bubble, and the bursting may not be over, one analyst said Monday.

"It's just amazing that the market gets suckered into this," said analyst Stephen Schork of the Schork Report, who called the idea of $150 a barrel oil "an obscene number, a perverted, illogical number." ...

"We clearly underestimated the depth and duration of the global financial crisis and its implications on economic growth and commodity demand," analyst Jeffrey Currie said in a report.

David Fyfe, an analyst with the International Energy Agency in Paris, was a bit less critical, avoiding the word "suckered." "To be fair, there is always a tendency in parts of the analyst community to look at short-turn trends and assume it's something that will continue in perpetuity," he said.

As recently as July the price of oil was rising based on strong global economic growth, especially in China and India. Now that the financial crisis is threatening to push the entire world into a recession, global economic weakness is likely a major cause of the drop in oil prices.

Also, $4 per gallon gasoline seems to have been the tipping point that encouraged many Americans to cut back on driving and stop buying SUVs. Americans consume roughly 25% of all the world's oil, despite the fact that we make up only about 5% of the world's population.

The Bush administration will invest about $125 billion in nine of the biggest U.S. banks...

The proposed cash injections in exchange for preferred shares are part of a $700 billion rescue approved by Congress and follow similar moves by European leaders to unfreeze credit markets by helping beleaguered banks. ...

The purchases represent a new approach for Treasury Secretary Henry Paulson, who first promoted a bailout targeted at illiquid mortgage-related assets. The urgency for a more immediate infusion has grown as banks struggle to regain the confidence of investors, counterparties and clients after bad loans caused more than $635 billion of writedowns across the industry. Paulson will discuss his plan at a press conference at 8:30 a.m. today in Washington. ...

The Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan, people said. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Wells Fargo is to get at least $20 billion, Goldman and Morgan Stanley will each get $10 billion, and State Street and Bank of New York will get about $3 billion each, people said.

The government will obtain its stakes with a type of security designed not to dilute the value of common shares.

None of the nine banks getting government money was given a choice about it, said people familiar with the plans. All of the banks involved will have to submit to compensation restrictions as mandated by Congress, people said.

I find the second to last sentence disturbing. Is America still a free country? Government has made a big grab for power under President Bush, starting with the Patriot Act. Now the government is forcing banks to sell parts of themselves. I wouldn't be as bothered if banks were voluntarily letting the government invest. But force? Does JPMorgan even need the money?

The preferred stock that each bank will have to issue will pay special dividends, at a 5 percent interest rate that will be increased to 9 percent after five years. The government will also receive warrants worth 15 percent of the face value of the preferred stock. For instance, if the government makes a $10 billion investment, then the government will receive $1.5 billion in warrants. If the stock goes up, taxpayers will share the benefits. If the stock goes down, the warrants will be worthless.

By comparison, the U.S. inflation rate over the past year has been 5.4%.

Monday, October 13, 2008

Paul Krugman, whose commentary I sometimes publish here on Bubble Meter, is the winner of the 2008 Nobel Prize in Economics. He was already the winner of the 1991 John Bates Clark Medal, which is actually harder to win than the Nobel. About 40% of John Bates Clark Medal winners have gone on to win the Nobel Prize.

Krugman was one of the few economists to recognize the housing bubble before its peak.

You know, five years from now, ten years from now, we'll look back on this period and we'll see that you could have made some extraordinary (stock market) buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well.

The Dow has shed thousands of points and the global economy is in crisis.

So who wants to buys a house right now? Not many people, it turns out.

The National Association of Home Builders, for instance, has seen its contract cancellations spike recently to as high as 30%, compared with an average rate of about 20%. During the housing boom, as few as 5% of sales were cancelled.

"The events of the past couple of weeks have people's heads spinning," said Steve Melman, NAHB's director of economic surveys.

The National Association of Realtors estimates that about 25% of the clients its members are working with are staying on the sidelines. They're looking at homes and intend to buy at some point, but right now they're worried about their jobs, their declining investments and falling housing prices.

"You have to have a lot of confidence to make this kind of big-ticket purchase in the current environment," said NAR spokesman Walter Molony.

Saturday, October 11, 2008

While it was booming, the real estate market in South Florida wreaked havoc on the already limited space for boat slips and dry docks. The area lost about 15 percent of its boat-storage capacity in the last six years because of waterfront development, according to the Marine Industries Association of South Florida (MIASF).

But now that the real-estate market bubble is bursting, it's unclear whether the boat-storage problem will get a much-needed shot in the arm.

"Fortunately, the real estate slowdown has relieved some of the pressure of nonmarine developments on the waterfront," says Frank Herhold, executive director of MIASF. "At the same time, the price of land has soared dramatically, and that could stymie new boating-related facilities from being developed."

The storage shortage also drove dock fees up—as much as ten percent a year in some places—and led to waiting lists 100 names long at public marinas and private storage facilities. …

"In five years I think you're going to see an extremely vibrant and strong marine industry in South Florida," Herhold says. "Right now, we are alleviating a lot of the boat-storage problems we face today."

Most cities in the United States showed little evidence of a housing bubble as of the end of 2004, according to a new study conducted by Columbia Business School and the Wharton School of Business at the University of Pennsylvania, which looked at 46 single-family housing markets from 1980 to 2004.

The researchers found that recent growth rates of home prices do not reflect a bubble and were largely explained by basic economic fundamentals such as low interest rates and strong income growth among high-income Americans.

No evidence was found that buyers are bidding up the price of houses based on unrealistic expectations of future increases.

Financial markets are frozen throughout the world, and former FDIC Chair William Isaac puts the blame squarely on the Securities and Exchange Commission and fair-value accounting—especially the accounting method's requirement that banks "mark to market" their assets.

"The SEC has destroyed $500 billion of bank capital by its senseless marking to market of these assets for which there is no market, and that has destroyed $5 trillion of bank lending," he said.

"That’s a major issue in the credit crunch we’re in right now. The banks just don’t have the capital to start lending right now, because of these horrendous markdowns that the SEC’s approach required."

Thursday, October 09, 2008

I’m sure we’ll be hearing all kinds of explanations of today’s drop... But you want to remember Robert Shiller’s classic real-time study of the 1987 crash. Basically, the crash had nothing to do with any news item. Investors sold because — drum roll! — prices were falling.

The price-to-earnings ratio for the S&P 500 is now 11.6, compared to an historical average of about 14. In the dozen years I've been investing, the S&P 500's P/E ratio has never been that low. (Damn bubbles!) As A Random Walk Down Wall Street points out, on average, the lower the market P/E ratio, the greater the future stock market returns over the long haul.

The Independent, a British newspaper, blames the Democrats for the failure of Fannie Mae and Freddie Mac:

What is the proximate cause of the collapse of confidence in the world's banks? Millions of improvident loans to American housebuyers. Which organisations were on their own responsible for guaranteeing half of this $12 trillion market? Freddie Mac and Fannie Mae, the so-called Government Sponsored Enterprises which last month were formally nationalised to prevent their immediate and catastrophic collapse. Now, who do you think were among the leading figures blocking all the earlier attempts by President Bush — and other Republicans — to bring these lending behemoths under greater regulatory control? Step forward, Barney Frank and Chris Dodd.

In September 2003 the Bush administration launched a measure to bring Fannie Mae and Freddie Mac under stricter regulatory control, after a report by outside investigators established that they were not adequately hedging against risks and that Fannie Mae in particular had scandalously mis-stated its accounts. In 2006, it was revealed that Fannie Mae had overstated its earnings — to which its senior executives' bonuses were linked — by a stunning $9.3billion. Between 1998 and 2003, Fannie Mae's executive chairman, Franklin Raines, picked up over $90m in bonuses and stock options.

Yet Barney Frank and his chums blocked all Bush's attempts to put a rein on Raines. During the House Financial Services Committee hearing following Bush's initiative, Frank declared: "The more people exaggerate a threat of safety and soundness [at Freddie Mac and Fannie Mae], the more people conjure up the possibility of serious financial losses to the Treasury which I do not see. I think we see entities that are fundamentally sound financially." His colleague on the committee, the California Democrat Maxine Walters, said: "There were nearly a dozen hearings where we were trying to fix something that wasn't broke. Mr Chairman, we do not have a crisis at Freddie Mac and particularly at Fannie Mae under the outstanding leadership of Mr Franklin Raines."

When Mr Raines himself was challenged by the Republican Christopher Shays, to the effect that his ratio of capital to assets (that is, mortgages) of 3 per cent was dangerously low, the Fannie Mae boss retorted that "our assets are so riskless, we could have a capital ratio of under 2 per cent".

Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. ... At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.

The magnitude of this financial disturbance should be placed in perspective. Although it is the most severe financial crisis since the Great Depression of the 1930s, it is a far smaller crisis, especially in terms of the effects on output and employment. The United States had about 25% unemployment during most of the decade from 1931 until 1941, and sharp falls in GDP. Other countries experienced economic difficulties of a similar magnitude. So far, American GDP has not yet fallen, and unemployment has reached only a little over 6%. Both figures are likely to get quite a bit worse, but they will nowhere approach those of the 1930s.

He is not fond of government bailouts, but he has this to say about TARP:

Taxpayers may be stuck with hundreds of billions of dollars of losses from the various government insurance provisions and government purchases of assets. Although the media has made much of this possibility through headlines like "$700 Billion Bailout," such large losses are highly unlikely except in the low probability event that the economy falls into a sustained major depression. Indeed, with efficient auctions, the government may well make money on its actions, just as the Resolution Trust Corporation that took over many savings-and-loan banks during the 1980s crisis did not lose much, if any, money. By buying assets when they are depressed and waiting out the crisis, the government may have a profit on these assets when they are finally sold back to the private sector. Making money does not mean the government involvement is wise, but the likely losses to taxpayers are being greatly exaggerated.

Wednesday, October 08, 2008

It is possible that the plan can be a "win" for both taxpayers and banks. One of the central tenets of economics is that a trade often involves gains to both parties and this is no exception.

The collapse of the housing market has sharply lowered the price of real estate, so many of the mortgages and securities issued against homes are now "under water," or worth less than the value of the house. If a lender wrote a $300,000 mortgage on a house that is now worth only $150,000, the "intrinsic" or underlying value of the loan is now 50 cents on the dollar. ...

But in these stressed times, the lot for mortgage lenders is even worse. Because of the current illiquidity of the mortgage-backed security markets and the confusion of ownership rights of some of these complex securities, investors are willing to pay only 30 cents on the dollar or less for an asset with a 50 cent intrinsic value. It is in this situation where the government has an opportunity to improve the lot of the buyer and seller. The Treasury has the ability to hold these assets until the mortgage is restructured in order to realize the intrinsic value of the loan.

This does not mean a recovery of 100 cents on the dollar, but, if the government can buy the loan for 40 cents, it can still receive a good return on the investment if prices eventually rise to only 50 cents. In the meantime, the financial institution has swapped a distressed asset for a highly liquid security.

Global growth is headed for a "major downturn'' next year, as U.S. gross domestic product grinds close to a halt, the International Monetary Fund said in a staff report prepared for a Group of Seven meeting this week.

"The global economy is entering a major downturn,'' the fund said in the report, dated Oct. 4 and obtained by Bloomberg News. "Many advanced economies are now close to recession, while emerging economies are also slowing rapidly.''

Growth is slowing across the world as policy makers struggle to contain the worst financial crisis since the Great Depression. ...

"All the advanced economies are stagnant or in mild recession now,'' John Lipsky, the IMF's first deputy managing director, in a Bloomberg Television interview. The slowdown is removing "inflationary dangers,'' making it appropriate for central banks in some countries to respond with lower interest rates, he said.

The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.

The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.

And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.

About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody's Economy.com.

The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."

Among people who bought within the past five years, it's worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site Zillow.com.

The Wall Street Journal also says that for the Washington, DC area, 33.8% of people who bought in the last 5 years are underwater on their mortgages. According to the Journal, DC area houses have fallen 18.6% since their peak and need to fall another 26.6% to restore historical affordability.

The U.K. government said Wednesday that it will pump as much as 50 billion pounds ($87 billion) of capital into the country's main banks as part of a rescue package designed to shore up the struggling sector. ...

The U.K. cash injection, which will be exchanged for a stake in the banks, is part of a package that also includes plans to boost liquidity and guarantee some new bank debt in an attempt to revive lending between firms.

Prime Minister Gordon Brown said the measures go much further than the U.S. deal to buy up risky assets and will give taxpayers "a share in the upside" when the sector recovers. ...

[The banks] have agreed to increase their total Tier 1 capital by 25 billion pounds before the end of the year. The government said it will make the money available to be drawn on as preference share capital or permanent interest-bearing shares and is also willing to assist in the raising of ordinary equity.

Banks are free to raise the cash without government help, but that's going to be hard for most firms given the state of the economy and the fact that many institutions have already asked shareholders for money.

Central banks around the world Wednesday cut interest rates amid mounting losses in financial markets, as the credit crunch continued to seize up lending.

The Federal Reserve lowered its federal funds rate a half a point to 1.50 percent. It also lowered its discount rate as well. The Fed, whose decision was unanimous, last cut rates a quarter point in April.

Central banks in the UK, European Union, Switzerland and elsewhere participated in the move. ...

Citigroup Inc. has become the latest large bank to back away from the crumbling mortgage industry, slashing the number of outside mortgage brokers it does business with and cutting 500 related jobs.

Citigroup Inc. ... is cutting back on its wholesale mortgage business as part of a restructuring plan announced Tuesday.

A Citigroup spokesman stressed that the firm is not abandoning the wholesale mortgage business, but is "redefining" it.

Citigroup will cut the number of outside mortgage brokers it does business with around the U.S. to 1,000 from about 9,500. The plan also involves laying off roughly 500 sales and operations employees. ...

A number of banks have abandoned the wholesale mortgage business, as the industry has collapsed as borrowers defaulted and related financial instruments crumbled, setting off a domino-like effect throughout the financial-services industry.

Tuesday, October 07, 2008

U.S. stocks fell, sending the Standard & Poor's 500 Index below 1,000 for the first time since 2003, on speculation banks and real-estate companies are running short of money as the credit crisis worsens. ...

The S&P 500 slid 60.66 points, or 5.7 percent, to 996.23, extending its 2008 tumble to 32 percent in the market's worst yearly slump since 1937. The Dow Jones Industrial Average dropped 508.39, or 5.1 percent, to 9,447.11, giving it a 29 percent retreat in 2008 that would also be the worst in 71 years. The Nasdaq Composite Index lost 5.8 percent to 1,754.88.